Stock Plays for China’s Leadership Change

China's once-a-decade leadership handover on November 15 will lift auto and consumer companies, according to a report by brokerage firm Kepler Capital Markets.

"We see a boost to Europe's China plays as the leadership transition ends political uncertainty, and in the medium term, a boost for car and consumer companies," wrote Zurich-based Jon Cox, head of European food and beverage research at Kepler, in the report.

Xi Jinping will succeed Hu Jintao on November 15 as secretary general of China's communist party, the highest political office in China. In contrast to previous leaders, Xi will be first among equals on China's governing council, the Politburo Standing Committee (PSC), whose members will be unveiled on the same day.

Cox forecast the new leaders will prioritize narrowing China's income gap as a means to build a consumer-driven rather than investment-based economy.

"We suspect this will further boost demand for consumer goods, while weaker state-sponsored investment and reform of the banking system might lead to less spending on capital-intensive industries," he said in the report, adding that current efforts to encourage consumer spending are already proving successful.

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Cox said that of European industries, the auto sector will be the biggest beneficiary from the regime change because it has the largest exposure to China. The top three European companies for absolute sales share in China are all auto manufacturers: Volkswagen, BMW and Daimler . Twenty-two percent of Volkswagen sales are to China, amounting to 45.6 billion euros ($59.2 billion).

While Europe's luxury consumer goods companies are also heavily exposed to China — nearly 40 percent of Swatch Group's sales are to China — Cox is unconvinced these will benefit as highly.

"Efforts to limit the income gap, potentially with a more progressive taxation system as well as possible further clamp-down on the practice of gifting, might not help demand for some high-end luxury goods such as watches," he said.

In addition, he said that rebalancing the economy away from state-led investment and exports might lead to reduced demand for capital goods and services, "Despite hopes by heavy equipment makers of a rebound in stimulus spending after the government transition."

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